Incredible shrinking GM files for bankruptcy

By Anne Davies Herald Correspondent in Washington

2 June 2009 — 12:00am

ONCE the world's biggest car company, General Motors filed for bankruptcy overnight but is expected to emerge within three months as a new, lean company owned by the US Government, which will provide another $US30 billion ($37 billion).

Senior White House advisers said the bankruptcy, the third-largest in US history, would not affect the Australian operations of GM Holden because they were currently viable and because the Australian Government had undertaken to support them.

Tough times ... the General Motors assembly plant in Kentucky.Credit:AP

The Government pledged $149 million to help Holden make a four-cylinder car as part of its Green Car Innovation Fund announced last year.

But the medium-term future of GM's foreign operations will depend on whether they generate sufficient revenues and attract enough government subsidies to be self sustaining.

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The officials said it was the Obama Administration's policy that "US taxpayers' dollars should stay within the US and it is not intended for taxpayers' dollars to go offshore".

GM's filing followed agreement by 54 per cent of its bondholders to a deal in which they will surrender $US27.1 billion in unsecured debt for 10 per cent equity in the new GM. This should help it move through the bankruptcy process more swiftly, perhaps within 90 days.

The Canadian Government will also provide funds and will take a 12 per cent stake, while the United Automotive Workers' Union will take over the health-care obligations of retired workers in return for a 17.5 per cent stake, to be held in a special trust.

Shares in the old GM will be virtually worthless. On Friday they were trading at US75 cents, down from $US93.62 in 2000.

President Barack Obama described the plan, which involves cleaving the viable assets from the old GM and putting them in a new company, as embodying "shared sacrifice".

As part of the bankruptcy, 14 plants will close in the US and the company will shed 21,000 jobs and axe 42 per cent of its dealerships.

The plan is to reduce GM's capacity to about 10 million cars a year, from the present 16 million, which will be closer to demand, which has slumped to 8.5 million.

This is new territory for the US Government which now in effect owns GM as well as a significant stake in Chrysler. Over the weekend on NBC, the President insisted he would have preferred to avoid taking a large government stake in GM.

"But the alternative was to see a liquidation, bankruptcy in which an enormous institution with huge importance to our economy simply gets broken up into pieces," he said.

Senior White House officials said the Government planned to be a shareholder only as long as was necessary to get the company back to health and would be a "hands-off" shareholder.

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The Government would set conditions upfront to protect the taxpayer interest. It is not clear whether it will insist on remuneration restrictions like those on banks which take bail-outs.

It would vote only on core governance issues, such as board appointments, leaving the day-to-day running to the company.